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Contrary to expectations by most analysts before the Monetary Policy Committee (MPC) meeting which held on Monday, 25th and Tuesday, 26th March, 2019 the Monetary Policy Rate (MPR) was reduced by 500 basis points to 13.5 per cent from 14 per cent. It is on record that the rates had remained at 14 per cent since July 2016; a period of over two years. Judging from both the statement and body language of the Governor of the Central Bank of Nigeria (CBN) before the meeting, it was concluded, as it happened with the first MPC meeting of the year which held on 21st and 22nd January, 2019 that a hold decision was going to be taken.

The Governor at a public presentation he made before the meeting did in fact say that inflationary expectations still remained high and since the trend in economic fundamentals are in the positive direction, that there was the need for the country to bide its time. It was therefore not surprising that a split decision was the situation that resulted in the decision to reduce the MPR and there would probably be no price offered for a guess on how the Governor voted at the meeting which at once speaks to the independence of members of the Committee in reaching decisions.

What really is the MPR and why is it so important for the economy? The MPR is the benchmark rate for interest in the economy. What that means is that this is the rate which the Central Bank would charge the banks that go to it for accommodation and therefore this is the base rate for interest charges in the economy at any particular point in time.

Often, awareness is not demonstrated with regard to the asymmetric corridor that accompanies the indication of this rate. As at today this corridor has been included as it has been the case for some time now as +2/-5 which in point of fact means that when the Central Bank lends to a financial institution the rate is MPR+2 which is 16 per cent and if on the contrary a bank decided to deposit its funds with the CBN it would attract interest payment of MPR-5 which is 9 per cent. This explains why average interbank borrowing rates as indicated in the recent monetary policy Committee communique was at the level of 16.45 per cent as should be expected marginally above the rate at which a bank will borrow from the Central Bank. READ ALSO:CBN GOVERNOR, GODWIN EMEFIELE AND PRESIDENT BUHARI&#8217;S ECONOMIC MANAGEMENT PROWESS

Interest rate is a veritable factor cost which means that this is a cost which any business that has availed itself of institutional credit must recover as part of the proceeds from the business and therefore the interest charges impact on the bottom line and in a situation whereby a competitor overseas enjoys lower cost of capital, automatically that competitor enjoys a competitive advantage. Even more important consideration is that for the real sector, such level of interest rate is difficult to support particularly having regard to the usual quantum of funds involved. But it is erroneous to suppose that anybody could wave a magic wand and the interest rates would come tumbling down over night.

The interest rate must be positive in real terms, that is, it must be above the level of inflation which has just been reported at 11.31 per cent as at the end of February, 2019 as it continues its south bound trend which has been witnessed so far for many months. In the unlikely situation of the interest rate being below the rate of inflation, which is very common with savings account holders in Nigeria today what then happens is that such savers pay an inflation tax to the extent of this differential.

It is also in order to observe that there are other headwinds which pose as causative factors for inflation in Nigeria today; expansive fiscal operations which results in large deficits whose funding either crowds out private sector interests and could be out rightly inflationary depending on the preferred method of funding the deficits, energy costs, gaps in requisite infrastructure, insecurity particularly in some regions of the country affected by Boko Haram insurrections and late passage of the budget which might necessitate sudden and massive injection of liquidity into the economy thereby overheating it. Therefore to win the war against inflation we must adopt a focused, consistent and persistent attack on all fours for us to have a chance of success and therefore it is unrealistic to expect good results by attempting only to regulate the amount of liquidity in the economy by keeping interests rates high.